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Authorised property unit trusts

Investors in “authorised” property unit trusts are set to win the same tax-efficient status as REITS (real estate investment trusts) according to a paper issued alongside the Budget.

Such vehicles have soared in popularity in the past couple of years as retail investors sought to pour money into commercial property. In just two years they have leapt from just 4 to more than 15, run by an array of fund managers.
However, they have been at a fiscal disadvantage since January 1 when REITS were set up, enabling many listed property companies to obtain tax-free status.

The authorised property unit trusts continued to pay 20 per cent corporation tax on their rental income, and stamp duty reserve tax on the exchange of units within the funds.

The government said in its paper that it had created a “framework” under which investors would face “broadly” the same tax treatment as if they owned property directly or through a UK REIT.

As such, the vehicle would pay no tax but individual investors would be taxed on their income at a personal level.

The government emphasised that the framework would be used as a basis for further discussions with the industry.

However, the plan is to publish a technical paper in the summer and, potentially, introduce draft regulations thereafter.

The plans do not apply to the large number of “unauthorised” property unit trusts, usually based in Jersey or Guernsey, which hold billions of pounds of commercial real estate on behalf of mainly institutional investors.

There will be no conversion charge for authorised property funds, in contrast to REITS, which had to pay a “conversion charge” of 2 per cent of gross assets to get tax-free status.

Under Financial Services Authority regulations, the investment funds will have to value their fund every day to give a precise allocation of fund income and expenses between property and other income.

Currently, property authorised investment funds fall under two categories – authorised unit trusts and open-ended investment companies. Existing AUTs will have to convert to OEICs to take advantage of the new regime.

In addition, the government is aiming to introduce a 10 per cent limit on corporate ownership of these vehicles – as already exists with REITS – and intends further discussion of this.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Budget 2007 information included in this article is subject to the Finance Bill becoming law.

Article date: 03.07